Economics Blog

Shutdown damage could grow

Oct. 1 saw the first government shutdown in 17 years. The failure to reach an agreement on a budget has resulted in a partial closure of the federal government.

Most Americans are seeing relatively little immediate impact from the budget stalemate. Stock prices have remained fairly stable, with investors largely betting that the differences will be resolved. An estimated 800,000 "nonessential" federal workers are furloughed across the country. It is presumed they'll get retroactive pay once the budget dispute is resolved, but that isn't immediately assured. If the shutdown persists, the damage likely will grow.

Workplace expert John Challenger, CEO of Challenger, Gray & Christmas Inc., worries about the financial ripple effect, beginning with furloughed workers and their families and extending to their communities. In a written statement, Challenger said these workers "are likely to go into full cost-cutting mode, spending only what they need to put food on the table and pay the most important bills. Dinners out, new furniture or appliances, vacations, and other discretionary expenditures are now off the table."

Others are feeling the pain in ways that many people might not have anticipated. Some of the things Americans can't do when the government shuts down? They can't visit national parks or Smithsonian museums. Presidential libraries are closed, the Internal Revenue Service call center is out of service, and the Social Security Administration won't issue replacement cards.

A plus side to a government shutdown?

Aside from the serious implications of the government shutdown, some folks are trying make the best of it. A number of Washington-area businesses are offering drink and food discounts for people who display federal IDs. One was even offering free hamburgers. On Twitter, the hashtag #ShutdownPickupLines has been trending to keep the comedy alive in a dire situation. It's even been picked up by major news sources.

Glad to know that even if elected leaders are lacking ingenuity, Americans retain a sense of humor.

What is your favorite joke you've seen about the government shutdown?

Listen to Mark Hamrick interview Nayantara Hensel on how the shutdown affects Washington.

Bankrate Audio

Mark

Hamrick

Washington Bureau Chief, Bankrate.com

Doug

Whiteman

Associate editor, Bankrate.com

Nayantara

Hensel

Former chief economist, Department of the Navy

The shutdown, Threatened default: The financial impact

With Washington gridlocked, hundreds of thousands of government workers are furloughed. What's the risk of a new crisis?

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Mark Hamrick: From Bankrate.com, this is Your Money This Week. Here we connect the dots between what's happening in the world and your wallet. I'm Mark Hamrick reporting from Washington.

Five years after the financial crisis, a feeling of "here we go again" fills the air in the nation's capital. Between the government shutdown that began Oct. 1 and the looming debt ceiling, plenty of risks abound. We chat with the leading economists about the fallout, and Bankrate's Doug Whiteman checks in with what you need to know about Obamacare, or the Affordable Care Act.

But first, we begin our conversation with Dr. Nayantara Hensel, the former chief economist for the Department of the Navy, and I asked her about the impact of the failure to fund the government, which has led to furloughs of hundreds of thousands of federal workers.

Hensel: There are so many concerns about contracting delays that Defense Secretary Chuck Hagel announced that he was going to be bringing back 90 percent of the 350,000 civilian workers who were sent home because of the shutdown. And that was again because we were already seeing slowdowns in contracts. That's part of the reason why the defense contractor Lockheed Martin is furloughing about 3,000 workers today here on Monday. United Technology originally had a planned furlough of nearly 2,000 Sikorsky Aircraft workers, but it canceled that when Secretary Hagel announced that he was bringing back some of the 350,000 civilian workers.

The main issues, though, are there is a ripple effect. It's not just an issue of contracts not moving within the Department of Defense or within other federal agencies. It's an issue of the fact that the federal employees become very uncertain. They're much less likely to buy, their consumer confidence is down, retail spending is down; it causes a chain effect, really, throughout the economy.

Hamrick: And we tend to focus on the Washington area because it's where we live, but I know that you said even members of your own family are affected by this far, far away from Washington.

Hensel: Absolutely. I mean, particularly in the Department of Defense, there's a number of different bases, different bases from different institutions linked to the federal government and linked to the Department of Defense all over the country. And those can have significant geographic impacts.

And there are chain effects, too. Many state governments -- including North Carolina, Arkansas, Rhode Island -- are furloughing employees whose pay would come from the federal funding. There are also concerns, for example, that the housing market is going to slow down because lenders won't be able to verify borrowers' income with the IRS and the Social Security Administration.

Hamrick: So the other thing that's out there, of course, is this looming worry about hitting the debt ceiling and Treasury Secretary (Jack) Lew saying that essentially that we will run into a problem with that no later than Oct. 17. And that brings about the specter of an unprecedented federal default. That is such an unmanageable concept to most people. What would the impact of that be on people's everyday lives if indeed that were to happen?

Hensel: Oh, it would have a very significant impact because it would substantially push up the interest rates that the U.S. government is going to be facing. The value of the dollar would plummet. We could see negative spillovers that could reverberate around the world.

Now I think that there are some possibilities that the default, if it happens, would happen around Nov. 1, because that's when actually the Treasury Department is scheduled to make about $60 billion in payments to Social Security, Medicare providers, active-duty military service members and so on. But the hope is that this isn't going to happen, that some improvement is going to happen and this gridlock will be broken.

Hamrick: And I was thinking about the fact that if, indeed -- I mean, we are talking about the risk if it does because it is so significant. But isn't it the lesson of financial crises, particularly one like this, that would be unprecedented, is that things happen that you really cannot predict also?

Hensel: Well, I think that that is very true. It's a lack of predictability. And it's unfortunate because this is a time when the Fed is looking at some positive economic data and thinking about whether or not they should taper off the (quantitative easing) program. Now they can't even get the labor report that came out on Friday. And as a result, economic data will be delayed.

Plus I do think that this could have, depending on how long it takes, a 0.3 (percent) to 0.5 percent reduction in GDP if it's a short government shutdown. If it's a longer government shutdown, it could be a decline of 1.4 percent if it runs three to four weeks. And that, in turn, would prevent the Fed from doing a tapering-off as soon as it had planned to because, again, the economic data, when it comes out, may not looking good.

One thing, though, that I think is very different about this relative to the previous federal shutdown in '95, early January '96, is that the economy at that time was growing by about 3 percent then. And that is obviously much higher than what we have seen so far with the most recent quarter's pace being below 2 percent. It was a different world in those days, and that's why I think that this is unprecedented.

I mean for example in the '95-'96 shutdown, defense bills had passed, defense spending bills had passed, and that allowed many major contracts to continue, and it limited the blow to both the public sector workers and the private sector defense firms. And we don't have that right now.

Hamrick: Yes. The dysfunction in Congress is really unfortunately being leveraged across the government with the officials' inability to plan on a long-term basis. If you want to try to do some capital investment in a department or invest in your workforce, it's rather difficult if you don't have a budget, right?

Hensel: It is. And you don't know how long this is going to last, how big your budget's going to be. And it makes this very, very tough to make more long-term decisions of significant capital investment or other things.

Hamrick: Dr. Nayantara Hensel, it's always a pleasure to catch up with you and we appreciate your time.

Hensel: Oh, it's a pleasure. Thank you very much.

Hamrick: Dr. Nayantara Hensel, former chief economist for the Department of the Navy. She spoke with us from Washington.

Next up, cutting through the noise surrounding health insurance. To be sure, there is a heightened political debate surrounding Obamacare. Well, what about the question whether you should look into the opportunities afforded individuals under the law? Bankrate's Doug Whiteman takes a look.

Whiteman: Obamacare's state health insurance exchanges for online marketplaces offer the promise of affordable plans for the uninsured or those who currently buy their own coverage in the individual insurance market. But what if you are insured through your job? Anyone can shop for health insurance in the state marketplaces, but one of the advantages is the tax credits that can cut the monthly premiums for those with household incomes either at or as much as four times the federal poverty level. But even if your income is within that range, you wouldn't qualify for a subsidy if you have employer-based health insurance that's considered affordable or adequate.

Hamrick: Finally, our look at this week in history. On Oct. 9, 1701, the colonial legislature of Connecticut charted the Collegiate School in Saybrook. The school moved to New Haven, Conn., in 1716, renamed Yale College two years later. It would become a university over the following century and awarded its first doctoral degrees, the first in the United States, in 1861.

You have been listening to Your Money This Week. Our thanks to this week's guest, Dr. Nayantara Hensel. If you enjoyed the podcast, please check us out on iTunes and rate and subscribe to the program. We're hoping that you can help us to get the word out. Also, check out our other podcast, Special Report with breaking news and special features. For more on this and other personal finance issues, visit Bankrate.com and you can follow us on Twitter at Bankrate.

Thanks to producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.

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1 Comment

carol Saavedra

October 06, 2013 at 9:12 pm

I am a Realtor in NC and the effects are that sales contracts are being terminated due to the government shutdown. The uncertainty of having a pay check to pay regular bills vs. owning a house has many worried. People do not want to have the commitment of owning a house not knowing if they will have a job, and will be able to pay a mortgage. Many homes will be back on the market for sure.

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